AFFORDABLE CARE ACT: THE NUMBER OF TAXPAYERS FILING TANNING EXCISE
TAX RETURNS IS LOWER THAN EXPECTED

Issued on September 22, 2011

Highlights

Highlights of Report Number: 2011-40-115 to the Internal Revenue Service Commissioners
for the Small Business/Self-Employed
Division and the Wage and Investment Division.

IMPACT ON TAXPAYERS

The Patient Protection and
Affordable Care Act and the Health Care and Education Reconciliation Act were signed
into law in March 2010.This legislation
contains revenue provisions anticipated to generate $438 billion in the form of
new taxes, fees, and penalties.One of
these new taxes is an excise tax on indoor tanning services (tanning tax) which
became effective on July 1, 2010, and
is 10 percent of the amount paid for tanning services.The tax is paid by the person receiving the
service and is collected by the service provider.The tanning tax is due and payable quarterly.

WHY TIGTA DID THE AUDIT

This audit was
initiated because the tanning tax was a new provision in the law that became
effective soon after passage, which increased the potential risks involved with
implementation.It has been estimated
that there could be about 25,000 tanning businesses affected by the
tax.The objective of our audit was to
determine whether the Internal Revenue Service (IRS) effectively implemented
this tax.

WHAT TIGTA FOUND

The IRS developed an outreach plan, updated the excise
tax form and instructions, and made preparations for receiving and processing
tax returns with the tax.In addition,
the IRS developed a plan for dealing with noncompliance, including initiating
audits and issuing notices to taxpayers who may potentially owe the tax.

The number of taxpayers filing
tanning services excise tax returns is much lower than expected.According to IRS documents, in April 2010,
the Indoor Tanning Association estimated that 25,000 businesses were providing
indoor tanning services.However, the
actual number of businesses liable for the tax has been difficult to determine
with any degree of accuracy.Identifying
these taxpayers has been one of the more challenging tasks the IRS has faced
when implementing this provision.For
the first three applicable quarters, the number of Federal excise tax forms
reporting tanning taxes has averaged approximately 10,300.

The IRS could have taken more timely actions to
contact taxpayers who may owe the tax.By the time notices were issued, tanning excise tax returns had been due
for three quarters.Late filing of these
returns would result in the taxpayer owing the unpaid tax, plus interest and
penalties.In addition, the information
used to identify these taxpayers appears incomplete.Furthermore, TIGTA advised the IRS that the
notice did not contain some pertinent information.The IRS added this information before
mailing.

Finally, the publication containing information about
excise tax requirements was not updated until more than a year had passed since
the provision became effective.

WHAT TIGTA RECOMMENDED

TIGTA recommended
that the IRS perform further analyses of the data sources used, including
records with incomplete address information, to determine whether a large
number of tanning businesses were not identified, monitor the results from the
notice mailing to determine whether additional data sources are warranted, and
update the excise tax publication to include tanning tax information.

In their response to the report, IRS officials agreed
with our recommendations.The IRS plans
to perform the analysis suggested, monitor the results of the notice mailing,
and consider additional actions based on the results.The excise tax publication was revised in July
2011 to include tanning tax information.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go
to: